AN unexpected drop in the global dairy market this week is tipped to be the start of a downward trend likely to put pressure on end-of-season farmgate price step-ups in Australia.

Dairy prices fell 3.9 per cent at the benchmark GlobalDairyTrade auction, despite futures prices suggesting they would actually lift in the run-up to the start of 2018.

The downward shift leaves the world dairy index at its lowest point in 14 months and was fuelled by buoyant milk output signs, according to dairy market watchers.

Dairy Australia’s senior analyst John Droppert said while the rally in futures to March made this decline surprising, broadly the expectation was for dairy markets to weaken into next year due to so much extra milk around the world being produced.

European production is growing at 5pc and much more United States production is being exported.

While the decline will need to be sustained for flow-on effects in Australia, it was likely systematic of a trend in the market and something our industry needed to be wary of, he said.

“Where farmgate prices are now secure, that trend is taking the headroom out of the ability for processors to offer step-ups at the season’s end - it will it harder to sell that last bit of product,” he said.

The end-of-year news has no doubt subdued the slither of optimism courtesy of rising global demand that milk producers were starting to express.

Hefty pressure on cash flow and profitability has plagued the game for a number of years but the latest Dairy Australia data indicates the industry has entered a period of recovery, with modest growth in national milk production anticipated this year.

Favourable weather had helped to keep costs down in a number of regions, DA’s 2017 Situation and Outlook report said.

It forecasts a total of around 9.2 billion litres for 2017/18, which would be in the growth range of between 2 and 3pc.

In domestic-focused regions, however, milk production is expected to be steady to lower this season.